At the end of 2017, its first year of operations, Kali Corp. prepared the following reconciliation between pre-tax accounting income and taxable income: The estimated lawsuit expense of $400,000 will be deductible in 2018 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The income tax rate is 25% for all years. Kali adheres to IFRS requirements. The current income tax payable is

Question

At the end of 2017, its first year of operations, Kali Corp. prepared the following reconciliation between pre-tax accounting income and taxable income:  The estimated lawsuit expense of $400,000 will be deductible in 2018 when it is expected to be paid. Use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years. The income tax rate is 25% for all years. Kali adheres to IFRS requirements. The current income tax payable is

Quizplus · Accepted Answer

To calculate current income tax payable, we need to identify the taxable income for the current year. Taxable income can be calculated by starting with pre-tax accounting income and adjusting for permanent and temporary differences.

Permanent differences are items that are included in pre-tax accounting income but never included in taxable income (or vice versa). In this case, there are no permanent differences.

Temporary differences are items that are included in both pre-tax accounting income and taxable income, but in different periods. In this case, there are two temporary differences:

1. Lawsuit expense: This expense is not yet deductible for tax purposes, but will be deductible in 2018. Therefore, we need to add back $400,000 to pre-tax accounting income to get taxable income.

2. Depreciation: Depreciable assets will result in taxable amounts of $300,000 in each of the next three years. This means that we need to subtract $300,000 of depreciation from pre-tax accounting income to get taxable income.

Pre-tax accounting income: $1,400,000
Add: Lawsuit expense ($400,000)
Subtract: Depreciation ($300,000)
Taxable income: $500,000

Now that we have taxable income, we can calculate current income tax payable by multiplying taxable income by the tax rate of 25%:

Current income tax payable: $125,000

Therefore, the correct answer is B) $75,000.

At the End of 2017, Its First Year of Operations